Vale Indonesia (INCO IJ)

2Q24 strong earnings as expected, albeit 1H24 still below seasonal achievements

• 2Q24 net profit of US$31mn was still below estimate (39.5%/34.1% of our/ cons. FY24F), however the result was well anticipated.
• INCO has the potential to sell up to 14Mt of saprolite and 42.5Mt of limonite once all mines are fully operational in FY25-26.
• We maintain Buy rating with a SOTP-based TP of Rp5,700. Key risks to our call include lower nickel prices and a lower utilization rate.

Stronger 2Q24 earnings, despite lower production

INCO reported a net profit of US$31mn, +402% qoq/-55.8% yoy, driving 1H24 net profit of US$37mn, reaching 39.5%/34.1% of our/cons est. This includes a non-cash unrealized loss of US$6 million due to a decrease in the fair value of KNI’s call option, which was revalued based on lower nickel price assumptions. Excluding this, INCO’s core profit for 2Q24 stood at US$36 million. Meanwhile, 2Q24 revenue reached US$249mn, +8.2% qoq/ -15.9% yoy, in line with our/cons. at 49.4%/49.3% of FY24 est. The revenue growth was driven by a stronger ASP of US$14.2k/ton, +12.4% qoq, despite a slight decline in production and sales volumes to 16.6kt and 17.5kt respectively, down by -8.5%/-3.7% qoq, due to heavy maintenance activities during the quarter.

Further clarity on INCO’s huge ore reserve

INCO has prepared its mine development to meet anticipated ore demand from its growth projects as follows:

• Morowali: begin sales in 4Q24, under review to cater for production of up to 7Mt of saprolite and 11Mt of limonite (sold on the market).
• Pomalaa: begin sales in 1Q25, with 7Mt of saprolite (sold on the market) and 21Mt of limonite (for HPAL JV) with capex of US$1bn.
• Sorowako: c.10.5Mtpa of limonite (for HPAL JV) with a capex of US$200-300mn.

In total, INCO could achieve annual sales of 14Mt of saprolite and 42.5Mt of limonite with a competitive blended cash cost of US$7-9/ton. (MBMA @US$10/ton, NCKL @US$7-13/ton).

Growth projects progress on track

The Morowali project reached 44% physical progress in June (vs. 34% in Mar24), with ore production to be expected as soon as 4Q24. Management expects to reach 70% completion by the year's end. The Pomalaa project has commenced the construction of HPAL, whilst its mine site will start producing ore by 1Q26. Meanwhile, Sorowako project has obtained FID for its mine project, and the preparation for HPAL construction is now underway.

Maintain Buy with a SOTP-based TP of Rp5,700

We maintain our Buy rating on INCO with a SOTP-based TP of Rp5,700. Key risks to our call include lower nickel prices, a lower utilization rate, and project execution delays.

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